Will History Repeat?

People are starting to whisper that next year history could repeat itself. Some economists predict 2002 could remind people of 1998, and one factor lies at the heart of the similarities – slaughter capacity.

Currently, packers have cooler space to kill about 395,000 hogs a day, or 100.7 million head annually. Packers can kill about 99 million hogs per year with no overtime, according to Glenn Grimes, University of Missouri agricultural economist.

Near-term hog slaughter doesn't appear to present capacity issues, but the fourth quarter of 2002 is setting up to pressure packing capacity to warrant some concern.

"Next year is the big question," says Grimes. "If we get another reduction in productivity growth then we will be right at packing capacity. If not, there may be problems."

Grimes refers to USDA's March quarterly Hogs and Pigs Report, which showed a slow down in productivity growth – up only 3 percent over a year ago. In March 2000, the productivity numbers were 5 percent higher than in 1999. That slow down in productivity growth is the difference between 101 million to 102 million hogs to be marketed in 2002 vs. 104 million.

"Productivity growth and the size of the sow herd are the two things to watch," says Steve Meyer, National Pork Producers Council's economics director. "If the sow herd increases to 2 percent or more above a year ago, or if productivity growth rises to 4 percent or 5 percent above a year ago, packing capacity will be challenged."

Pigs per litter appears to have leveled off some lately, with USDA's March pig crop report showing pigs per litter up less than 1 percent from March 2000, and only 1 percent higher than in 1999.

However, total productivity could still climb higher, as heavier market weights and more farrowings per sow per year account for 2 percent of the 3 percent increase in the total pounds of pork produced per breeding animal, notes Chris Hurt, Purdue University agricultural economist. That number is the one that's been climbing over the last decade, from 2,200 pounds in 1990 to 3,022 pounds last year.

How prices perform in response to having more hogs sent to market than packers can kill will depend on how far capacity is exceeded and for how long. However, Meyer says live hog prices in the $20-per-hundredweight range are certainly possible. And there's always that downside target of $8 hogs set in 1998.

Timing of the hog marketings also is vital to prices. In 1999, U.S. packers slaughtered more hogs than in 1998, but they were spread out more evenly throughout the year. There were 27.6 million hogs killed in the fourth quarter of 1998. In 1999, 26.7 million of the 101.5 million hogs were slaughtered in the fourth quarter.

The packing industry started moving toward the current state of slaughter capacity about a decade ago. Two primary factors lead to this tighter slaughter capacity, according to Meyer – the closing of many unprofitable plants, and the permanent double-shifting of existing plants.

"Inflexibility is one reason the market ran into capacity problems," says Grimes. "In the past, plants could run 10-hour shifts rather than 8-hour shifts to add capacity. Now, the only thing that plants can do is run on Saturdays and some of them already do that all the time."

Events of the last year have done little to change the packing capacity situation for 2002 and beyond. Seaboard scraped its plans to build a 15,000-head-per day slaughter plant in Elwood, Kan. However, that plant probably would have been killing few, if any, hogs before 2003.

The one possible increase in slaughter capacity could come from Farmland. Farmland is currently looking at the environmental and operational impacts of double-shifting its Crete, Neb., packing plant. No timeline has been announced for the project, the company says.

One of the more likely changes on the packing landscape may take place in Canada, says Meyer. It's possible Maple Leaf Foods could add the second shift for which its Brandon, Manitoba, plant is designed, while closing one of the recently purchased Schneider Foods plants.

Grimes doesn't believe changes in the Canadian packing scene will ease any pressures on U.S. capacity. Canada is expected to expand production around 4 percent, but Canadian exports to the United States – particularly feeder pigs – show no signs of slowing down.

"I would predict feeder pig imports from Canada will continue to grow, with no decline in market hogs," says Grimes. "It's more expensive for the Canadians to kill their own hogs, because most of their plants are small and they have a higher labor cost than the United States."
The take-home message is that U.S. slaughter capacity is about 15,000 to 20,000 head per day larger than in 1998, but that U.S. production may still grow enough to tax plant capacity in the fall of 2002. The rest of this year shouldn't press capacity, but if the U.S. breeding herd grow by 2 percent or more, or if productivity growth returns to the high levels that existed before the March Hogs and Pigs Report, the fourth quarter of 2002 could be a repeat of 1998. As the old saying goes, "Those who don't learn from history are doomed to repeat it."

Fewer packers = More power

It's no secret that the largest packers have been growing over the last 17 years. Today the top 10 packers have an incredible amount of pricing power.

Add to that power, the fact that more and more of the hogs those packers kill are guaranteed by some sort of contract or agreement. In 1997, the spot market accounted for 43.4 percent of the hogs sold, but by 2001 that number had shrank to 17.3 percent.

The following chart shows how the top 10 packers have more control than ever over the market. This shows how consolidation has been increasing and when it started to really take off.